Allocation of Orbit and Spectrum Resources for Regional Communications: What's at Stake? Molly K. Macauley Discussion Paper 98-10 December 1997 1616 P Street, NW Washington, DC 20036 Telephone 202-328-5000 Fax 202-939-3460 © 1997 Resources for the Future. All rights reserved. No portion of this paper may be reproduced without permission of the author. Discussion papers are research materials circulated by their authors for purposes of information and discussion. They have not undergone formal peer review or the editorial treatment accorded RFF books and other publications. Allocation of Orbit and Spectrum Resources for Regional Communications: What's at Stake? Molly K. Macauley Abstract Contentious debate surrounds allocation of the geostationary orbit and electromagnetic spectrum, two resources used by communications satellites. An extensive economics literature alleges that the nonmarket administrative allocative procedures now in place are highly inefficient, but no research has empirically estimated the welfare loss. This paper develops a conceptual framework and a computerized model to estimate the economic value of the resources, the size and distribution of welfare costs associated with the present regulatory regime, and the potential gains from more market-like allocation. Key Words: outer space, communications satellites, pricing natural resources JEL Classification Nos.: H4, Q2 ii Table of Contents I. A Note on the Resources ............................................................................................... 4 II. Estimates of Site Values under the Existing Regulatory Regime: The Fixed Proportions Case ........................................................................................................... 5 A. The Model ............................................................................................................. 5 B. The Data ................................................................................................................ 7 Technologies ......................................................................................................... 7 Demand ................................................................................................................. 8 C. Estimates of Orbit Site Value ................................................................................. 8 III. The Model with Substitution Possibilities ....................................................................10 A. The Model ............................................................................................................10 Demand and supply ..............................................................................................10 Locational equilibrium ..........................................................................................11 Deriving site values, R ..........................................................................................12 B. Estimates of Orbit Site Values ..............................................................................12 C. Sensitivity of Results to Parameter Values ............................................................13 IV. Welfare Cost ................................................................................................................14 V. Conclusions .................................................................................................................16 Appendix: Derivation of Site Value Equation (10) ..............................................................17 Data Appendix ....................................................................................................................18 Data Sources and Methodology ...................................................................................18 Data Appendix References ...........................................................................................19 References ..........................................................................................................................20 List of Figures and Tables Figure 1. Geography of Satellite Footprints ......................................................................23 Figure 2. The Geostationary Orbit: The Estimated Cost Savings by Satellite Location for Countries in Central and South America and the Caribbean ...............................24 Figure 3. The Geostationary Orbit: The Estimated Cost Savings by Satellite Location for Countries in the Pacific Rim ..............................................................................25 Figure 4. The Geostationary Orbit: The Estimated Cost Savings by Satellite Location for Countries in the Greater Pacific Rim .................................................................26 Figure 5. The Geostationary Orbit: The Estimated Cost Savings by Satellite Location for Countries in the Western Pacific Rim ................................................................27 Table 1. Parameter Values ..............................................................................................13 Table 2. Sensitivity Results .............................................................................................13 Table 3. Estimates of Annual Welfare Cost Based on Satellite Location: Central and South America and the Caribbean ......................................................................14 Table 4. Estimates of Annual Welfare Cost Based on Satellite Location: Pacific Rim .....14 iii ALLOCATION OF ORBIT AND SPECTRUM RESOURCES FOR REGIONAL COMMUNICATIONS: WHAT'S AT STAKE? Molly K. Macauley* A host of telecommunications services -- long-distance telephone calls, television programs, texts of newspapers and other periodicals, and an increasingly large amount of intracorporate data -- travel by way of satellite. Almost without exception, these communica- tions satellites are situated in a particular orbit in space known as the geostationary orbit. The orbit, centered about the equator, is some 170,000 miles long--but two factors limit its use. One factor is signal interference among neighboring satellites which arises because geo- stationary satellites communicate at the same electromagnetic frequencies. To mitigate interference, regulations on use of the orbit require a physical distance of 800-1600 miles between satellites. The second constraint on the use of the orbit is the geographic earth coverage uniquely associated with each location along the orbit. Figure 1 indicates the countries and regions that a satellite can "see" from different locations (identified by longitudinal degree).1 (Figures follow references at end of paper.) For example, a satellite at 250 degrees can see the Caribbean, the United States, and Canada. Such a location would be advantageous for a "regional satellite" connecting all of these countries, but not if one country wants the location solely for its own domestic use. During the heyday of satellite communications in the late 1970s and early 1980s, communications suppliers clamored for access to the orbit, and increasing orbital congestion brought acrimonious national and international debate. Although rapid strides in fiber optic technology in the late 1980s caused demand for orbit access to level off, debate has recently resurfaced. Over 200 satellites now populate the orbit and the waiting list for access includes companies proposing new services (such as direct-to-home broadcast television and mobile communications for trucking or airline fleets) and representing newcomers, particularly developing countries, now entering the market for satellite services. Perhaps the most * Senior Fellow, Energy and Natural Resources Division, Resources for the Future. This research incorporates comments from sessions at the American Economic Association meetings and at the Annual Telecommunications Policy Research Conference, as well as from conference participants at a symposium, "Law and Economics of Property Rights to Radio Spectrum," hosted by the University of California, Davis. Comments from Bruce Hamilton, Harold Demsetz, Eva Kalman, Doug Webbink, Tim Brennan, John Ahearne, an anonymous referee, and the editor have been particularly helpful. Portions of this research were funded by Resources for the Future. Responsibility for errors rests with the author. 1 In this figure, as well as other figures in this paper, representation of degrees longitude uses engineering convention rather than map-making convention. The mapping convention distinguishes east and west longitude by dividing the 360 degree circle into east and west segments of 180 degrees beginning at the prime meridian in Greenwich, London. The reader can rescale the figures to be consistent with this convention by subtracting 360 from all points between 180 and 360 degrees and taking their absolute value. 1 Molly K. Macauley RFF 98-10 dramatic recent demand is a claim by Tonga to 16 geostationary orbital locations that link the United States and Asia.2 Because the orbit is allocated on a first-come, first-served basis, the inefficiencies and rent-seeking typically ascribed to such nonprice administration might be expected to arise. An extensive economics literature has followed these developments, alleging the inefficiency, unfairness, or both of the regulatory process.3 The literature frequently recommends auctions, lotteries, or other more marketlike alternatives to administrative allocation, but the literature has not yet estimated either the size of potential efficiency improvements or the distributional effects of such